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After a frantic emergency summit, France, Germany and Spain finally announced a co-ordinated rescue plan to halt the vicious sell-off in the European banking sector and buy the paralysed money markets a new lease of life. Most of the €950bn (£750bn) package will go towards guaranteeing interbank loans, but Germany and France will also follow the UK’s example in taking equity stakes in undercapitalised banks.

But will this be enough to silence the eurosceptics, who poured scorn on the initial piece-meal efforts of eurozone leaders to tackle the crisis? Angela Merkel’s sudden decision to guarantee German deposit accounts, coming only hours after she affirmed the need for greater cooperation at a summit in Paris, seemed the perfect illustration of the European condition: tax payers contribute millions to endless discussions, but when it comes to the crunch, it’s every member state for itself.

The problem was partly the extraordinary pace at which the banking crisis deepened. At first, there was not time to coordinate internationally on anything more than interest rate cuts – a politically straightforward measure, as it does not involve taxpayers’ money.

Another obstacle was a reluctance to admit the crisis is truly European. Ireland, Spain and the UK have seen a housing boom turn to bust. But Germany, for one, has not had a property bubble.

This does not mean Germany has been cushioned from the crisis. The lender IKB Industriebank was one of the first victims of its exposure to US mortgage-backed securities last year, while Hypo Real Estate, like the UK’s HBOS, risked going bust this month due to its dependence on international money markets. But the absence of UK-style headlines about falling house prices made it harder for politicians to build public support for costly schemes to bail out bankers.

Difficult week

After a particularly difficult week on the trading floor, politicians were prepared to take action 10 days ago. But the result was a Franco-German axis with Spanish support, rather than a pan-European front. Italy was said to be developing its own solution. Even Spain is not fully party to the scheme: Jose Luis Rodriguez Zapatero said his government did not need to take stakes in the Spanish banks because they remained solvent.

This highlights one of the main obstacles to European consensus: the variety of different banking models. The current liquidity crisis may be global, but it has affected different banks in different countries in different ways.

Finding a plan targeting the specific needs of the UK banks proved challenging enough: finding one which suits all European banks requires even greater clarity on what exactly went wrong.

The banks in those economies that have seen unprecedented property price appreciation – Ireland, Spain and the UK – are suffering from a failure of confidence in their domestic mortgage books that has threatened their slender capital ratios. But even those countries that have not faced the same exuberance in real estate have often imported problems.

The Scandinavians banks, for example, looked to the Baltic States to satisfy investors’ thirst for growth, feeding a credit boom that is now unwinding. “They’ve been looking for growth overseas as their domestic markets were flat. They got it, but at quite a cost now,” says Oliver Russ, manager of the £377bn Resolution Argonaut European Income fund.

The Austrian banks are in a similar situation, according to Kevin Lilley, European fund manager at Royal London Asset Management, because they sought growth from their neighbours in eastern Europe. “People in places like Hungary have borrowed in euros for their mortgages, because European interest rates were lower and their local currencies were strengthening. But they were earning in the local currency, which is a risk. Now the currencies are weakening, some can’t afford the repayments,” he says.

Conversely, having a domestic property crisis has not held the large Spanish players back. The Bank of Spain has higher capital requirements than its counterparts elsewhere in Europe, which means the Spanish banks have been better placed to absorb the asset writedowns than many of their competitors in more stable economies like Germany. Santander and BBVA have also been sheltered by their international exposure, particularly their businesses in the emerging markets of South America. Their domestic market share, meanwhile, has been squeezed by the cajas or mutuals, which have denser retail networks. This plays to their advantage now, explaining why Santander was able to snap up Bradford & Bingley’s savings book on the cheap.

Separate problem

A separate problem has been exposure to the US sub-prime housing market through mortgage-backed securities. UBS, Credit Suisse and Deutsche Bank built up US-style investment banking operations over the bull market, and their traders stacked up billions in collateralised debt obligations and other opaque securities ultimately backed by US sub-prime mortgages. After the first quarter of 2008, UBS estimated its total writedowns at a colossal $37bn (£18.5bn).

The most widespread affliction in the current market, however, is a dependence on money markets to meet basic business needs. Banks are refusing to lend to each other for longer than a single night, leaving companies like Hypo Real Estate or HBOS with a large gap in their finances.

The danger is then that any news of a funding shortfall would lead to a run on the bank by depositors, precipitating a similar collapse to that which derailed Northern Rock.

Banks from Greece to Portugal are subject to this problem irrespective of their exposure either to US sub-prime securities or a dubious domestic mortgage book. The only exceptions are banks with high capital ratios, large depositor bases and broad international exposure. Like Santander, BNP Paribas flaunted its cashflow confidence by buying the Belgian part of Fortis for €14.5bn, over a third of which was in cash. It is now the largest European deposit bank. HSBC said it had no intention of taking up the British government’s offer of extra capital, as it can move cash from its international business into the UK subsidiary to boost the capital ratio to the newly required level.

Investors are naturally focusing on these larger, more diversified players. In a crisis of confidence, size matters. This is something eurosceptics are wont to forget. Iceland – and the Icesave debacle in the UK – is a reminder of what could have happened to any number of smaller European countries without the support of the ECB.

“Capital is very risk averse in this market and it doesn’t like a liquidity trap,” says Mr Russ. “Smaller nations faced with a banking run would not have the resources to get out of it. The euro has been very good for them.”

Stephen Wilmot is features writer at Investment Adviser